Abstract:
As the popularity of passive investment has grown it has given rise to numerous
phenomena. Among these is a pricing anomaly around the event of a share entering
or exiting an index. Numerous event studies have quoted theoretical performance
figures that can be achieved by trading on this event. However they do not consider
the practical elements of an investor trying to achieve these.
This study sought to understand whether this event can be practically traded by an
investor. This has provided insight into the realities of the event beyond the
theoretical observations in the existing literature. The findings hold relevance for
passive and active investors alike, as well as management of the listed companies
within this segment of the market. This study calculated two different investment
styles, which the literature has suggested should be profitable, but has applied
practicality constraints in order to test the real world applicability of the findings. The
two styles were built and iterated to optimise the performance using share data from
the Johannesburg Stock Exchange (JSE) between January 2005 and September
2019.
The results showed style 1 was unable to outperform the J200 or J201 on a
consistent basis. Style 2 was able to massively outperform, theoretically achieving
226% annual returns. However once the practicality constraints, primarily cost, was
factored in the style produced a -30% return over the full period. This raises
significant questions of the, until now, belief that this event produces a large
outperformance which is likely being traded by investors.
